The course weblog for PA5113, State and Local Public Finance, at University of Minnesota

Friday, March 27, 2009

St. Paul: How to increase City property revenue 27% without (technically) raising taxes

For a few short years, the City of St. Paul turned its back on property tax increases, and instead raised revenue by blazing a different trail. St. Paul shifted a core piece of its services - street plowing, cleaning, sidewalk repair, and lighting - off the property tax levy and onto a special fee. St. Paul's experience has been mixed at best, but it provides an interesting window into a local government willing to experiment with a different approach to municipal finance.

The story begins as former St. Paul Mayor Randy Kelly narrowly beat his opponent in 2001 carrying the now-familiar "no new taxes" banner from his predecessor, Norm Coleman. Kelly, like Norm Coleman before him, was elected as a strongly pro-business centrist. But unlike Coleman, Kelly inherited a city in the midst of an economic slowdown. Moreover, the local government aid (LGA) that sustained the City budget was fast being cut. How Kelly tried to keep his "no new taxes" pledge while holding the City together became a defining part of his four years in office.

As LGA was cut early on in his tenure, Kelly had to put his best foot forward. Kelly's solution to the City's economic challenges was to dramatically increase street maintenance fees. During those three years from FY 2003-2005, street maintenance fees increased multiple times, totaling $9 million. The costs of things like sidewalks, street cleaning, snow plowing and street lights were now funded largely by the right-of-way maintenance fee, instead of property taxes. The fee is assessed based on how many linear feet of street frontage a property has. Homeowners who lived on street corners have about twice as much street frontage, and therefore pay twice as much fee.

To be sure, the net impact of the move toward fees has been the subject of much conversation in the City. According to an excellent 2005 analysis by the St. Paul Pioneer Press, three years into Kelly's term, St. Paul property taxpayers were paying 22% more to the city in combined taxes and fees than they were when he came into office. Except, technically speaking, there were "no new taxes". Just fees.

The Pioneer Press analysis concluded that if the same amount of money had been collected through the established property tax system, 77 percent of homeowners would have had to pay more in property taxes than they did in fees. However, it was the lower-value property owners who ended up paying considerably more in fees than they would have in taxes. That's because unlike taxes, the right-of-way fees didn't take into account whether a 100 foot lot had a million dollar mansion on it, or a $50,000 fixer-upper - both would pay the same amount.

But most everyone else has tended to be a loser in the deal. If you owned a house on a street corner, you found yourself paying twice as much right-of-way fee as their next-door neighbor, because they had twice as much street frontage. Only 28 percent of commercial-industrial property owners saved money under the fee plan; most of the rest paid more, and sometimes considerably more. The analysis shared the example of a truck dealership that faced a $7,000 more in fees, instead of the $1,700 more they would have had to pay had the increase taken the form of property taxes.

Part of the sly brilliance of the plan was that it collected money from St. Paul's substantial list of non-taxable properties. While non-profits like Hamline University or the Wilder Foundation don't pay property taxes, they too had to pay the right-of-way maintenance fee. St. Paul Public Schools also ended up paying an additional $130,000 to the City.

But perhaps the most telling part of the equation was who ended up as the biggest winner. St. Paul's downtown business community had become particularly sensitive over the prior decade about losing downtown businesses to the suburbs. Law book publisher Thompson-West left downtown St. Paul in the 1990s, along with a series of smaller firms. The business community had spent great resources stemming any additional flow of business from downtown.

The fee scheme tread lightest the most densely-built properties. Dense properties packed in the maximum property value per foot of street frontage, which made them the biggest winners of all under the right-of-way maintenance fee. And the very downtown businesses with which business leaders were most concerned about were not coincidentally the biggest beneficiaries of the new fee system. In fact, the fee was designed by Joe Reid, an advisor to the St. Paul Chamber of Commerce. Unfortunately, this angle was entirely missed by the Pioneer Press analysis.

As a matter of policy, the fee increases were obviously a regressive way to raise revenue. It did expand the revenue base by raising money from non-profits that didn't contribute to city coffers. It did diversify the tax base, though as some noted, it may have done as much to confuse taxpayers as make government more transparent. Notably, it favored dense properties - something many urban planners would actually appreciate. The fees, quietly, are still a part of St. Paul's revenue system.

But of course, the story of "no new taxes" didn't end gracefully for Randy Kelly. In the end, Kelly was unable to keep his campaign promise, and he proposed a plain old tax increase during his final year in office. After feeling great heat for his fee increases, and after famously endorsing President Bush in a heavily Democratic city, Kelly was defeated by the largest margin of any incumbent Mayor in City history. And in a related note, local leaders haven't been so keen on those fees lately.